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Is Eni in Line for a Big Payday?

Italian energy major Eni (NYSE:E) is seeking billions from Norwegian oil and gas producer Statoil (NYSE:EQNR) in a dispute over gas contracts. In all, Eni is likely to demand as much as $10 billion over a previous 20-year supply agreement that is now proving to be very expensive for Eni.

If Statoil were on the hook for the full sum, it would surely put a dent in the company's exploration and production efforts. And, recent news of Statoil's 2014 plans indicates this may already be affecting the company's future growth initiatives. Many European energy majors, including Eni, are struggling to keep their profits afloat this year. Investors are likely wondering whether the possibility of $10 billion in Eni's coffers represents a positive catalyst, and by the same token, if Statoil should now be avoided.

What a difference $10 billion makesEni's case against Statoil revolves around a 1997 supply agreement that tied natural gas prices to refined oil products, which was a common practice in past agreements of this nature. These contracts have come back to bite Eni and others as they're now proving to be prohibitively expensive since gas prices have fallen relative to oil prices.This has caused a backlash against Statoil and others who utilized these contracts, including Russian giant Gazprom (NASDAQOTH:OGZPY).

For Eni, a $10 billion cash injection would present a significant sum. Eni booked a 9 billion euro adjusted profit over the first nine months of the year, which represents a 38% drop versus the same period last year. Weakness is being felt across many of Eni's business units, including its exploration, production, and downstream segments.

One factor harming Eni's progress is the huge bet it's made in Libya, where civil unrest and labor disputes have significantly disrupted production. In fact, Eni has more operations in Libya, which is proving to be a high-risk geography, than any other driller.

As a result, Eni's capital expenditures have slowed in recent years as its underlying business struggles. Its capital expenditure budget is unchanged since 2008, and now the company has turned to asset sales to raise cash. Eni recently announced it would sell a considerable interest in a natural gas field in Russia for $2.9 billion to Gazprom and other buyers.

As far as Statoil is concerned, a $10 billion judgment against the company would have a significant impact. Statoil already announced it would be much more discriminating in the projects it undertakes going forward. The company stated it will keep 2014 exploration spending flat versus this year's total, although it's worth noting that 2013 spending came in at a company record of $3.75 billion.

Management's intention is to be more selective in the new opportunities it targets because it wants to more effectively manage its capital investments. While a connection between the arbitration case with Eni and halting next year's spending can't be determined with total certainty, it's not entirely out of the question to connect the two developments. It's reasonable to assume that losing $10 billion would place even greater importance on project selectivity in the future.

Keep an eye on Eni and StatoilThe arbitration case between Eni and Statoil involves huge sums of money, and would represent a key consideration for investors should Eni receive the entire $10 billion. Statoil has a lot to lose here, as it's already showing signs of reducing capital expenditures to save cash. Eni, meanwhile, could certainly use the cash injection in light of the difficulties it's seeing in its key areas. Refining is serving as a huge drag, and supply disruptions in Libya have made 2013 a difficult year to say the least.

As a result, you would be wise to monitor developments closely. A $10 billion judgment would have a pronounced impact on both Eni and Statoil, which is why you should keep your eyes on this case.

Author

Bob Ciura, MBA, has written for The Motley Fool since 2012. I focus on energy, consumer goods, and technology. I look for growth at a reasonable price, with a particular fondness for market-beating dividend yields.